Mexican Peso Eases from July 2024 Highs

The Mexican peso weakened to around 17.88 per dollar as risk aversion increased after President Donald Trump signaled the Iran conflict could drag on, pushing oil prices sharply higher and weighing on emerging market currencies. The move also followed a dovish shift from Banco de México, which resumed its easing cycle with a 25 basis point rate cut to 6.75% in a split decision, reflecting concerns over slowing economic activity. Policymakers signaled the possibility of one additional cut while closely monitoring inflation and external risks. Recent data showed annual inflation accelerating to 4.63% in early March, with core inflation at 4.46%, both above the central bank’s 3% target. The currency also faced pressure from widening rate differentials expectations and uncertainty over the outlook for growth and inflation.

The Mexican peso rebounded toward 17.8 per US dollar as a broad retreat in the US dollar and growing expectations of a Middle East ceasefire restored appetite for riskier assets. While the currency faced pressure last month amid a weakening carry trade and safe-haven demand, it has rebounded as the greenback lost ground on signals of a potential de-escalation. President Donald Trump suggested the conflict with Iran could conclude within weeks and indicated a willingness for the US to step back from direct involvement which reduced the urgency for safety in the greenback. Despite this recovery the peso remains sensitive to narrowing interest rate differentials after Banco de México recently cut its rate to 6.75% while the Federal Reserve maintains a stable stance. Although high domestic rates previously supported the currency, investors are now weighing the impact of policy divergence and the risk that any failure to confirm a regional resolution could quickly restore dollar strength.

The Mexican peso weakened past 18 per US dollar to its lowest since early December as a diverging monetary policy outlook between the US and Mexico reduced the currency’s longstanding carry trade appeal. Traders reacted to the Bank of Mexico unexpectedly resuming its easing cycle with a 0.25% rate cut to 6.75% while headline inflation spiked to 4.63% in mid-March. This move was primarily driven by weakness in domestic economic activity just before the unemployment rate rose to 2.6% in February. Global sentiment further pressured the peso as the dollar strengthened after reports that the Pentagon may send 10,000 more troops to the Middle East while President Trump extended a deadline to attack Iranian energy infrastructure for 10 days. Underemployment at 7.0% and high informal employment at 54.8% alongside narrowing interest rate gaps have limited the peso’s appeal as markets now price in a 50% chance the Federal Reserve could hike rates by December.